The great Warren Buffett is entitled to his opinion. David Ranson, head of research with Wainwright Economics holds a different outlook for gold and sotcks.

As a result of the US equity market’s January performance, Wainwright now calculates that the market is well on the way to retrieving lost ground from its sell off in the third quarter of last year; however, there are only a few percentage points of short-term upside left for stocks, and significant downside given the general level of instability in the markets for sovereign debt and currencies.

Going forward, Wainwright sees a flat stock market – until there is some major change in government policy perhaps as a result of the coming elections. High-yield debt is likely to underperform the stock market – except, perhaps, for the lowest grades.

The upward trend in the price of gold remains undiminished by its recent weakness, and Dr. Ranson expects further gains in 2012. The Implacable One believes it is driven primarily by the rapid rate at which federal debt held by the public is rising – four times as rapidly as the economy.

The US economy remains on the losing side of a worldwide competition for capital. In fact, the theme of much of Wanwright’s work in recent months has been the controlling role in the world played by the flow of capital. Growth appears wherever capital converges, and you could say that capital pursues economic wisdom, or that economies managed by wise policies show a strong tendency to grow at the expense of economies where unwise policies prevail. In other words, follow the wisdom.

I guess you mean "the price of pile A" rather than value. It makes sense for Warren Buffet, as a "value investor", to consider that nothing (a new technology or industrial use) raised the value of gold. The price has risen only as a function of demand and that demand is purely speculative. There is not much "value" (not enough to justify its current price, which is exactly Buffet's point) in pile A apart from the weird attraction it exerts on humankind.

When fiat currencies are debased and unworthy of trust one must turn to the only ultra liquid assets which can't be debased (precious metals) in order to keep a reasonable portion of their assets liquid. This isn't rocket science. Very odd that Buffet doesn't understand as much. Perhaps he thinks governments will resolve their debt debacle by becoming fiscally responsible all of a sudden rather than by debasing their currencies. Given his remarkable investment record one must wonder how he could be so naive when it comes to governments and politics.

If you read the entire Buffett interview he absolutely agrees that governments debase anything that derives it's value from nominal returns, hence his statement with respect to federal debt: "They have taken 'risk free assets' and [at current pricing] turned them into return-free risk."

He also acknowledges that BH needs to keep some of its assets in liquid form ($10-20 billion) and that it's regrettable that with the liquidity of Treasury bills (his preferred form of 'cash') comes measurable erosion of purchasing power. So clearly he gets that governments ruin currencies (he even shows that inflation has over time taken three times as much from investors' returns as income taxes).

Buffett's point was that the only reliable protection against inflation is quality assets that produce cashflow and can increase that cashflow to offset for inflation. Gold doesn't fit the bill because, obviously, it produces no cash flow. And it's not attractive as a 'cash equivalent' because the price is so volatile.

So rather than gold as an inflation hedge, Buffett proffers shares of dividend paying consumer staple companies. But those companies are immune neither from inflation in the cost of their inputs (periodic erosion of net cashflows), nor are their dividend yields secure from dilution by greedy or inept managers. Gold may not be perfect but at least its value isn't contingent upon trust in someone else.

Sounds good in theory but in the inflationary environment we can expect over the next ten years, or however long it takes, cash flowing assets will produce negative real returns, after inflation and taxes, while producing a capital loss as inflation and long rates rise.

Wealth will be protected by assets which offer scarcity value. Precious metals just happen to be the most liquid of those assets. Look at the history of any unanticipated price inflation for an illustration. The 1970's in the US offer a relatively mild example.

Last I checked, there is no "Bank of Jerusalem" that has been in business for more than two millenia.
Good luck finding a bank that has survived civil wars, bank runs, nationalization and confiscations, pograms etc.
A modest tax on interest is a small price to pay for the depositors, and rentiers for that matter, to ensure stablity and that civilization survives so that the deposits are there later when the grandkids want to collect their inheritance.
But I suppose Jesus would have been lucky. As far as I understand he had no heirs who would have squandered his legacy.

We'd need to know what that dollar would have bought in Jerusalem at the time it was deposited. Since we are pretty sure that inflation has averaged more than 1% over that time period, it's safe to say that Jesus' account value buys fewer bananas now than when he started (pre-tax, of course).

Wait, can't you fit $9.6 trillion into a few electrons on some circuit board. And isn't money even more inherently useless. I had thought that Mr. Buffett does not think we shouldn't use a medium of exchange.

I found two definitions, one meaning "gambler" and one meaning "layman/customer".

I normally would not ask such a question, except I notice that the same word appeared three times in this week's newspaper ("Brewers' droop", "Getting to the naked truth", and "The modern matchmakers"). The word's sudden appearance makes this Yank want to kick something.

I'm too busy this morning to think about this carefully, but is there an average/marginal trick going on here?

Couldn't one do the same calculation using one pile with all the world's diamonds (or copper or any non-essential commodity) and another pile (or tank) with all the fresh water? Who would ever buy all the world's diamonds and then die of thirst.

Benjamin Graham mentored Buffet and if you read any of Graham’s books you will know as much about investing as does Buffet. But Buffet’s trashing of gold advertises that he didn’t learn everything his mentor had to teach.

Buffet laments the declining value of the dollar and it’s that devaluation that causes “money-market funds, bonds, mortgages, bank deposits, and other instruments” to be risky because price inflation destroys their value. But if you own gold, inflation won’t destroy your wealth. So why trash gold when it is a far better investment than those he mentions.

True, gold is not as good an investment as the stock market over the very long run. But stocks are very volatile compared to gold. And, stocks without price inflation will return only about 2-3% per year. The rest is due to inflation. So gold doesn’t do much worse than stocks and does far better than other investments.

Why doesn’t Buffet compare a portfolio of pure gold with any stock portfolio over the past 20 years? I will bet that gold performed favorably compared to the stock market.

Buffet: “What motivates most gold purchasers is their belief that the ranks of the fearful will grow. “

People don’t buy gold because of the greater fool theory. It’s not like tulips at all. Nor do they buy gold out of fear. Buffet is no more of a psychic than he is an economist. The money supply determines the value of gold in the long run. As the US and Big EZ flood the world with cheap paper the price of gold will continue to rise. But it’s not just gold. Silver, copper, wheat, corn, oil and all commodities respond to money printing in the same way as gold.

A time may come in the distant future when the two largest economies in the world are not trying to flood the world with cheap paper. If that ever happens, gold prices may decline some. But one thing we don’t have to fear is that central bankers will go to rehab and get over their love of inflation.

You write "True, gold is not as good an investment as the stock market over the very long run." Mr Buffett is famously a "buy-and-hold" investor, so I would presume that this fact weighs heavily in his decisions.

(This does not mean, of course, that such an investment strategy works for all people. Others are more tolerant of high-beta investments.)

That's true. But he admits that he holds money market funds and treasuries for liquidity reasons. There isn't much that is more liquid than gold.
Jimmy Rogers is as good an investor as Buffet. He just isn't as well known. Roger invests almost exclusively in commodities.
Buffet doesn't invest in things he doesn't understand. He never invested in dot.coms during the late 1990's run up and he said it was because he didn't understand them.
He would have been more honest to simply say that he doesn't understand commodities, especially gold, and so wouldn't invest in them.

How do you invest in gold? It doesn't generate a return and has a high annual mgt cost (for physical). If it doesn't appreciate, you can't make money - unlike say a solid cash generating company whose share price could flatline for 10yrs, but they have a high payout ratio and manage their business steadily for cash.

Jeremy Siegel's work is a good place to look this stuff up, but stocks have produced 6.7% real (over inflation) returns over the past 200 years. Gold has produced about 1% real over that same time frame.

And while gold has undoubtedly done better than stocks the last 12 years during one of the worst periods in stock market history, over 20 years it's underperformed.

Every portfolio needs a little gold in it for apocalypse insurance, but 5% is plenty. Stocks >>>> gold. Or better yet to take it back to Buffett's argument, productive assets >>> gold. It's not even close.

My defense of gold wasn't meant to suggest that people should invest exclusively in gold all of the time. I was merely responding to Buffet's suggestion that we should never invest in gold because it's a stupid investment.

A good investor should not buy and hold as Buffet claims he does, but doesn't do. He often sells stocks when he thinks their over valued. His mentor, Graham, never insisted on buying and holding forever, either. He recommended buying dividend paying stocks when the price was low and selling much of them when prices were high.

There are many long periods in which stocks under perform other assets, such as gold. Wise investors know when to be in which asset. Gold is a good investment for part of your portfolio when central banks are intent on papering the world with their currencies. Other commodities will do as well especially oil.

Check out the German hyperinflation of the early 1920's. Those who owned gold prospered. Few expect hyperinflation in the near future, but the principle is the same: gold retains its value when central banks destroy the value of their currencies.

How does an investor make money on a "cash generating company whose share price" flat lines for 10 years? Inflation destroys the value of that investment at about 2-3% per year. So for ten years you will not only have made zero return but inflation will have eaten away at what you did have.

The last 12 years have been the most important years of investing for baby boomers. I'm always preaching to look at the long run, but 200 years is a bit of a stretch even for me. I'm not recommending gold exclusively forever. Don't get married to any asset class. Know when to be in socks, bonds, cash or commodities.

That's not true. Dividends are higher than inflation only if you manage to buy the stocks in a depression after the stock market has collapsed. Today, dividend yield is about 3% on average and inflation about 2%.

You're a legend in your own mind. You didn't demolish anything. As I wrote, there is a time for every asset class. Because gold has outperformed stocks for the past 12 years doesn't mean that it won't continue to do so. These aren't random events. They have clear cause/effect relationships. Gold will continue to outperform stocks as long as the causes remain in place.

Buffet essentially said there is no time or place to invest in gold. Stocks and land are always better investments. That's simply not true. A lot of investors have done very well investing in nothing but commodities.

I wasn't considering dividend payments. Yes, if you have invested in good dividend paying companies you will do well even if the price of the stock never rises.

But keep in mind that in order to have good dividend yields you have to get into the stock market after it has collapsed and prices are low. Even then, inflation will erode much of that yield.

If you're going to earn a decent return, you have to rely on price appreciation in addition to dividend yield. And you have to sell near the top and buy near the bottom of major market changes. That is not much different from buying gold and selling gold.

Buffet merely advertises how silly people become when they get out of their area of expertise. Buffet knows about picking good companies to invest in. He knows nothing about economics.

Buffet should compare the changes in value between Exxon Mobile stock and gold over the past decade. He would look like a fool for choosing Exxon.

Anyway, Buffet's analogy is totally irrelevant. He is talking about long term investing, which is all he knows. People buying gold are worried about inflation. Stocks are a good inflation hedge, too, but people want to be diversified and stocks prices are more volatile. Of course, cropland is a good hedge against inflation, too.

Mr Buffet is a MUCH more successful man than I, but there is one point on which I disagree. I do believe he is wrong when he asserts that commodity money is sterile. Please understand that I am no "goldbug". I do not own the stuff, and I do not see a situation in which I would like to own it.

But basic economics tells us that money serves several functions. It is a store of value and a unit of account; in these functions I agree that it is basically sterile. The other function of money is to serve as a medium of exchange. In this case, it is not sterile - it is a productive tool, like a tractor or a computer or a factory. It is fitting, then, that that the terms "money" and "capital" are frequently interchanged.

The letter starts by talking about the dangers of inflation. I agree that this is a real problem, so it is puzzling when author writes that "if you own one ounce of gold for an eternity, you will still own one ounce at its end." I would point out that one of the positives of commodity money is that *you still have one ounce at the end*, and not one-seventh ounce. And in the interim between here and eternity, by the way, the gold would have served as a productive (non-sterile) capital.

I think Buffett's point is that if an investor were to pick pile A over pile B for the reason you describe, they would be doing so only on the basis of the "greater fool" theory - an inert cube of (mostly) useless metal has no intrinsic value. It produces nothing valuable and has a negative carry (you incur a cost to own it).

However, there is a flaw in this line of thinking. The flaw is not your own; it is derived from the way the original comment was framed.

This scenario ignores the entrepreneurial function. Without entrepreneurs - to organize the farming of land and the drilling of oil - these resources would not be worth the money that the investor paid. Then the wiser choice would certainly Pile A.

The questioner neglects to ask what is being aimed at. Entrepreneurs are certainly motivated by profit, but this is not their only consideration.

I was not trying to use "entrepreneurship" in its current, faddish sense. I was identifying it as the fourth factor of production that coordinates use of the other three factors (land, labor, and capital). Managers can perform the same functions, but if NOBODY performs it, then the three "multiply specific" will be put to suboptimal use (or may even remain as "sterile" as commodity money allegedly is).

I do not mean to assert that there is no distinction between an entrepreneur and a manager. Say hello to the principal/agent problem. Other than this point, I think that you and I are basically talking about the same thing.